Summary
- Bulls look at the last few months and claim that a new bull market has already started and SPX is heading towards a new all-time high.
- Bears look at the last few months and claim that this is just another bear market rally and SPX is heading towards a new 52-week low.
- We fear the fire (economy) more than we count on the fireman (Fed Chair Jay Powell) and surely more than we're encouraged by the extinguisher (rate cuts).
Let's sum-up yesterday's (Feb 7) atmosphere across the stock market:
Fed Chair Jay Powell: I see disinflation ahead [After I got "transitory" inflation wrong for 2 years].
Market: Jay just said inflation is going down >>> Buy everything!
[Of course, credit markets tell you a different story (and they tend to be more accurate than stocks), but that's for another day and another time.]
It may sound funny, but that's exactly how the stock market is operating these days.
Sure, the S&P 500 (SPX) is moving up because FOMO is causing up days to be of greater magnitude than down days (except for the DJIA).
Nonetheless, if you look at the past 4 trading weeks (including the one we're at), you see the following SPX behavior:
Week | Days | UP | DOWN |
Feb 6 | 3 | 1 | 2 |
Jan 30 | 5 | 3 | 2 |
Jan 23 | 5 | 3 | 2 |
Jan 16 | 4 | 1 | 3 |
Total | 17 | 8 | 9 |
Since MLK Day, we actually had more down than up days!
That's not a sign of a bull market, that's a confused market.
You know what? We don't even need to go back 17 trading days; it's enough to look at what happened yesterday.
Initially, Powell's remarks pushed the SPX up as much as 1.64% (green lines)... Then, different remarks took the index down 1.81% (red lines)... just to see another spike of no less than 2.16% (purple lines) to finish the 6.5-hour long trading day on a strong foot.
Just as we mustn't confuse FOMO with Bullishness, we mustn't interpret Confusion as Enthusiasm.
But don't think for a minute this is truly "bullish" or suggesting something is better with the economy.
FOMO aside, the only thing that drives the recent alleged "new bull market" is the belief in/hope for an end of the tightening cycle, just behind the corner.
Leave the fact that not a single FOMC member sees a rate cut in 2023... Leave the fact that Powell keeps saying that (at least) a couple more rate hikes are on the table... Leave the fact that even investors are now pricing in one rate cut in December...
Instead, let's focus on the (far from being certain) scenario that the Fed is going to start cutting rates inside 2023 (whenever it's going to be).
Will it be such an encouraging step? Because a much more logical interpretation for a Fed that starts cutting rates is that the economy is too weak and needs a push. [Otherwise, why cut in the first place? It's still legal to stop hiking and stand still.]
Cutting rates, by definition, implies that something is wrong/bad and requires fixing.
The assumption/belief that "Pivot" is a blessing that ought to send stocks higher is a myth.
Friendly reminder: early 2000s.
There's no need for an extinguisher (rate cuts) if there's no fire (bad economy), and if this is the case, investors should be way more worried about the fire than encouraged by who or how it's going to get extinguished.
For further details see:
Fireman Jay